One of the many changes to retirement plans brought about by the SECURE Act being signed into law by President Trump on Dec. 20 after sailing through Congress as part of the larger government spending bill is to required minimum distributions (RMDs).
Acknowledging that Americans are living and working longer, the SECURE Act increases the RMD age from 70½ to 72, applicable to distributions made after Dec. 31, 2019, for individuals who reach 70½ from Jan. 1, 2020 on.
Americans will also have the option to keep contributing to individual retirement accounts after the age of 70½ (which was previously not allowed), as long as there is earned income to contribute in the first place. The 70½ rule began in the 1960s when life expectancy was shorter.
Prior to the SECURE Act, participants in qualified retirement plans generally were required to begin receiving certain minimum distributions by April 1 of the calendar year following the year in which the participant attains age 70½ or terminates employment, whichever comes later.
However, plan sponsors can still choose to require distributions at an earlier age (for example, at normal retirement age). This change applies to both defined benefit plans and defined contribution plans.
A Morgan Lewis LawFlash Alert says plan sponsors will need to evaluate the new RMD rules and generally amend plan documents to reflect the new RMD age of 72 in required provisions that govern the required minimum distribution rules.
Plan sponsors will need to evaluate, and likely update, current policies and procedures for notifying participants of an upcoming RMD trigger date and for updating any notices that it sends to participants regarding RMDs.
The alert adds that plan sponsors and recordkeepers will need to coordinate their approach to address the new RMD rules. For example, distribution reporting will need to be updated beginning January 1, 2020, for participants who turn 70½ in 2020 to ensure that distributions between age 70½ and 72 are treated as being eligible for tax-free rollover, and subjected to a mandatory 20% withholding to the extent not rolled over.
Michael Kitces shared his perspective on the RMD changes in a blog post to his website.
“As was the case with the IRS’s recent proposal to update the RMD life-expectancy tables, since only about 20% of retirees take no more than only the amount that they’re actually required to take, any changes in the rules around RMDs will have little effect on the remaining 80% who are already withdrawing more out of their accounts than the IRS requires,” Kitces said. “In addition, the SECURE Act does not change the age at which an individual can make a Qualified Charitable Distribution from their IRA, which remains at age 70½ and now creates a unique 1- or 2-year window where IRA distributions may qualify as charitable contributions, but not as RMDs (that haven’t yet begun).”
The RMD changes are seen as a boon to most taxpayers who can afford to delay taking money out. It is estimated the changes will cost the Treasury $8.9 billion in lost tax revenue over the 10-year budget window.
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
